Kenya: China Ready to Pounce As Tullow Oil Bows Out

An oil terminus at the port of Mombasa (file photo).

The Covid-19 pandemic has come as the last nail on the coffin of Kenya's oil export dream as currently structured after British oil major Tullow Oil served the government with a force majeure notice, which means that it can no longer deliver its part of the contract.

This has now handed China the biggest opportunity yet to snap up the deal, after it emerged as the front-runner in the race to buy off the Kenyan oil project from the struggling British firm.

On Friday, Africa Oil Corp revealed to its shareholders in Canada that its partner here, Tullow Oil Kenya, had submitted notices of force majeure to the Ministry of Petroleum and Mining on Friday on behalf of the joint venture partners in the Turkana oil blocks.

A force majeure notice is declared when a company is unable to perform its obligations in a contract due to unforeseen events that can be described as an 'act of God' such as calamities, floods and disasters. In contracts, this is synonymous with filing for divorce or separation.

The Petroleum ministry confirmed it had received the notice but did not offer a comment on what it means for Kenya and the way forward.

"We are studying it," Petroleum Principal Secretary Andrew Kamau said in a text message response to the Sunday Nation.

Tullow was still working on an official statement on the developments by the time we went to press.

The British firm, which has been struggling to remain afloat due to its global financial crisis, has found an excuse in Covid-19 to pull the plug on its operations in Kenya and force the government back to the drawing board.


In March, the British explorer shocked the Kenyan government after it slapped the Ministry of Petroleum with a Sh204 billion bill as compensation for its six-year works in the Turkana oilfields.

The government rejected the bill, terming it excessive and unjustified. This set the two on a collision path and it was only a matter of time before things went south.

Oil firms recover their exploration costs over years once production and sale of the commodity start, which in Kenya's case is planned for 2022.

The disagreement over the bill also adds to Tullow's financial constraints that have seen the firm plan cut a third of its staff to save about Sh2 billion after being hit by weak output in Ghana, delays in East Africa and lower-than-hoped-for oil quality in Guyana.

It is also understood that the trigger was in the new tax measures introduced by the National Treasury, which have substantially increased the costs for doing business for the oil explorer in Kenya.

Tullow Oil is the operating partner on Blocks 10BB and 13T in Kenya. "These declarations are the result of impact of the Covid-19 pandemic on the operations, including Kenyan government's restrictions on domestic and international travel, and recent tax changes that adversely impact the project economics," Africa Oil said in a statement on Friday.

"These are exacerbated by the recent unprecedented crash in global crude oil prices."

The firm said that the declaration of force majeure allows for an improvement in the operating environment and for the joint venture partners to discuss with the government of Kenya the best way forward for this strategic project.


Africa Oil is a Canadian oil and gas company with producing and development assets in deepwater Nigeria, development assets in Kenya and an exploration or appraisal portfolio in Africa and Guyana.

The company is listed on the Toronto Stock Exchange and on Nasdaq Stockholm. Africa Oil said it is obliged to make public such information pursuant to the EU Market Abuse Regulation.

The firm said it hopes the operating environment, adversely impacted by the Covid-19 pandemic, to improve and the potential outcome of discussions between Africa Oil, its partners and government of Kenya.

But the firm said there is no certainty such discussions with the government of Kenya will result in a satisfactory outcome and may result in the company's Kenyan project being significantly modified or ceased in its entirety.

This comes at a time when China is back on the front seat in the race for a piece of the action from project.

The Asian giant has emerged as the potential partner that will help Kenya realise its oil dream after key players - Tullow Oil Plc and Total SA - started the process of selling part of their stakes in oil discoveries in Kenya.

The sell down by these two firms will further delay the project, which has seen its timelines shifting annually, raking up costs that will eventually be borne by the taxpayer.

China National Offshore Oil Corporation (CNOOC) is one of the top favourites to buy the 32.5 per cent share of the project up for sale, which would make it a majority partner and a key decision maker in unlocking the current stalemate.


Currently, Tullow has a 50 per cent stake in the project, with Canadian firm Africa Oil holding 25, and French firm Total SA holding the other 25 per cent.

"CNOOC has a large strategic interest to bundle the Kenya oil assets with Uganda assets. They exited the Kenyan market in 2014 after a failed exploration in Isiolo, and this would be a perfect opportunity for them to buy in. They are primed to have these assets," people familiar with the matter said.

Should China get the deal, it will cement its presence in key infrastructure projects in the country, having clinched the over Sh500 billion standard gauge railway (SGR), which was done by China Roads and Bridge Company, the Sh32 billion Lamu port undertaken by China Communications Construction Company, and other key roads.

The win would also be a big coup for the country that has been fighting off Western countries' influence in the continent, locking down key projects under Beijing's BRI programme.

Tullow, which has already struck a deal to sell its entire stake in its operations in Uganda, is seeking to sell down its stakes from its current 50 per cent to 30 per cent, while its partner Total is seeking to sell half of its 25 per cent stake.

"I am not at liberty to discuss with whom we are in discussions, but China is not off the table either. Those in this process demand that we honour the non-disclosure agreements and I will ask to respect that for now," Martin Mbogo, the former Tullow Kenya managing director, told they Nation in an earlier interview.

"However, we are looking for a company that shares in the vision of the project oil Kenya and have the capacity to work in such frontier markets. Our expectation is that by June, we'll have narrowed down to who is interested and what we can get out of this, then conclude."


Tullow says it expects to use these proceeds to offset the costs it has incurred, and plough back some into the project, which it says it is committed to.

Total was initially primed as a partner that would have bought out Tullow, but industry sources intimate that the French firm did not really go out to buy the Kenyan assets, but got through in bundle as part of the Maersk.

"Total didn't intentionally buy into the Kenya assets. Kenya was bundled together with other Maersk assets, which Total bought. Given that they are also selling down, it is unlikely Tullow would be selling to Total," the source said.

If China's national oil firm was to get the majority stake in the Kenyan project, it would have total control of the project, making key decision-making easier.

Mr Mbogo said that the new partner would have a direct say on how the project moves, especially if they buy the other farm-down, which would make the process hasten, cutting back on the delays.

The Chinese government's national oil firm exited the Kenya oil exploration market six years ago after failing to strike commercially viable oil or gas exploration blocks in Isiolo.

Tullow and Total hired Paris-based investment bank Natixis SA to assist with the sale. The London listed firms' sale, Mr Mbogo said, was part of a broader review of its operations and assets intended to simplify the business and cut costs.


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